Noted long-term stock market bull Jeremy Siegel (Wharton School author of Stocks for the Long Run) has changed his bullish tune and now believes asset prices are likely to plunge by 40-50% in value because of the high prevalence of retired workers and the increasing gap between age of retirement and death. With this decline the standard of living of retiring baby boomers would halve.
Apart from people working about 12 years longer, which Siegel sees as unlikely, a possible – and unlikely - salvation is for the assets to be purchased by younger newly-affluent workers in the developing world. These workers should become rich because of the information revolution and globalisation. Indeed Siegel sees large US current account deficits as a healthy trend that will do exactly that. But, as The Economist remarks:
‘ The biggest danger is that growing protectionism in the rich world will both
slow the rate of growth in the developing world and prevent its demand for
shares being met. Mr Siegel views the recent opposition to purchases of American
firms by companies from China and Dubai as decidedly ominous’.
Michael Milken is more optimistic than Siegel. He believes productivity growth will continue unabated and life expectancy will increase to perhaps 120 years with people working longer and thereby saving the day even without the help of newly-rich developing countries. In fact Milken believes these trends will create a shortage of securities that will drive up prices. He also sees a wealth tranfsfer to developing countries facilitating sustainable wealth accumulation.
This optimistic view of the world is inconsistent with recent trends that link reduced working lives with increased life expectancy. But it is consistent with labor shortages driving up wages encouraging older people to remain in the workforce even if arn't dramatic improvements in life expectancy.
Even if Milken is right and Siegel is wrong all is not lost:
‘there may be an ounce of good news among the bad. If politicians realise that
foreign buyers are needed to prop up the value of America's retirement savings,
they may be less inclined to flirt with protectionism’.
Different aspects of the debate between Siegel and Milken are in Business Week.
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5 comments:
I had read with great interest that article in the Economist - when I saw your post, I was hoping for more of your own opinion!
Fwiw, I think Milken is if anything under-stating life expectancies, and I think that people will definitely work longer, if only to escape boredom. Picture yourself having blown half a multi-million dollar nest egg (a lot of boomers have one of them) over ten years of 'retirement', hale and hearty and only 75 - what would you do?
Patrick, The only intrusion of my own opinion is my view that labour market shortages will boost wages and encourage older citizens to remain in the workforce and hence reduce their effective retirement.
For example there will be a drastic shortage of university academics as their age profile is biased towards oldies like me. I suspect there will be plenty of part-time and full-time work options.
And of course if wealthy stocks do decline in value working longer won't be a choice - it will be an imperative.
By the way these labour market pressures will impact on youth as well. I expect there will be strong incentives for the young to enter the workforce - at least part-time. It is already happening.
It seems likely that many boomers will die sitting on a healthly portfolio of assets, rather than spending it all before they go. Which will then be passed on to their children. I'd expect a huge transfer of wealth to echo boomers, Gen yer's, over the next 40 years.
Why do most economists believe that labor market shortages caused by aging will boost wages in the long term ?
Although it seems like the obvious first prediction, the reality doesn't seem to be born out in all of the oldest countries in the world. (Japan, Germany, many places in Eastern Europe and so on). An alternative view is that long term labor market shortages will simply mean certain types of industry will collapse. Thus you might get a short term wage increase until the industry becomes unviable.
It also doesn't appear true of certain industries where recruitment is a problem already -- the university system seems to compensate simply by hiring worse people. Presumably this has to end somewhere, consequences unknown.
I think that more part-time work is spot-on. But the biggest impact, as suggested by the original article, will be on borders.
After all, we can simply outsource a lot of the work we still do with little enough difficulty - increasingly we will, and in all likelihood those we outsource to will invest at least some of their earnings in our companies, probably even as we invest at least some of ours in theirs.
I doubt that any change will be so immediate or drastic as might be suggested though.
Incidentally I doubt the x-ers will get much of anything - their parents will live too long and the inheritances will go mainly to the x-ers' children:)
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